San Diego Investment Sales Drop in 1H18

Investment sales volumes in San Diego declined in the first half of the year. According to new research from CBRE, total sales volumes across property types dropped 35% in the first half of the year compared to the second half of 2017 and sales volumes dropped 25% below the five-year average. While sales volumes fell, cap rates remained stable compared to the second half of 2017.

“There were a number of contributing factors, however, one key component has been the rise in interest rates,” Hunter Rowe, VP at CBRE, tells GlobeSt.com when asked about why the sales activity fell so significantly this year. “The 10-year treasury was around 2.4% late last year and has since fluctuated and risen steadily to where it is today, 3%. That said, I feel the capital markets have adjusted and buyers and sellers are coming back to the table.”

Industrial and multifamily cap rates continued to decline in the first half of the year. Multifamily cap rates fell to a record low as investors continue to pay top prices from multifamily assets with the average per-unit price reaching $271,000 in the first half of the year. That is the highest average price since 2003. Industrial cap rates also continued to decline for the second half-year in a row. Cap rates for industrial product are now at a record low as well. Office and retail cap rates, on the other hand, are less exciting. Cap rates were flat for class-B and class-C office product, while cap rates for class-A and class-AA assets increased 12 to 13 basis points. Retail cap rates rose in the first half of the year, but the average price per square foot increased 16.2%.

Despite the slow down in activity, the same report also shows that San Diego benefits from healthy fundamentals. In fact, activity is expected to rebound—and recover—in the second half of the year. “San Diego County unemployment rate is hovering around 3.5%, and we are still seeing strong regional job growth,” adds Rowe. “Additionally, leasing activity, net absorption and rent growth continue to perform well, which are all key indicators of market fundamentals. Furthermore, the lack of new construction and deliveries to our market, has helped keep fundamentals and supply and demand in check. This is in stark contrast to the previous cycle where over supply of new construction in some submarkets had long-term effects.”

Investment capital is active in San Diego, but is focused on value-add deals. There are limited value-add opportunities in the market, which may also be contributing to the slowed activity. “Similar to other West Coast markets, there is a tremendous amount of capital chasing a diminishing supply of value-add investment opportunities,” Rowe says. “This is causing many traditional institutional value-add investors to refocus on higher yielding core-plus office campuses that are well located and amenitized. Although, we have seen a few new out of town buyers, primarily focused on core-plus suburban office product and chasing higher yields than what assets are trading for in parts of LA/OC and the Bay Area, the majority of our buyers have been the traditional San Diego investors.”

Thanks to the strong fundamentals and active capital in the market, the second half of the year is expected to rebound. “Despite the slight slowdown in sales activity through the first six months of 2018, I expect sales volume to rebound in H2 2018 with several high-profile listings scheduled to close,” says Rowe. “As I sit here today, there are 19 office assets either on the market or in escrow, and more than half of those are scheduled to close in the fourth quarter.”